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Fitch Affirms Ras al Khaimah at 'A'; Stable Outlook

May 14, 2012

Fitch Ratings-London-05 April 2012: Fitch Ratings has affirmed the Emirate of Ras al Khaimah's (RAK) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' with Stable Outlooks. The Short-term foreign currency IDR is affirmed at 'F1'. The Country Ceiling is 'AA+' (equal to the UAE Country Ceiling).

"Ras al Khaimah continues to make steady progress reducing an already modest debt burden, executing a focussed development strategy, and improving data quality to track progress," says Richard Fox, Head of Middle East and Africa Sovereign Ratings at Fitch. "Debt is edging down closer to 20% of GDP and the economy has recovered well from the global and regional crisis, showing an impressive ability to diversify markets and attract foreign investment."

Public finances and macroeconomic performance are the main rating drivers for RAK. As the fourth-largest emirate within the UAE, RAK benefits from the federal government's (FG) provision of basic social and physical infrastructure, as well as the UAE's monetary and exchange rate arrangements. The UAE Country Ceiling is 'AA+', underpinned by the external assets and oil wealth of the largest emirate, Abu Dhabi ('AA'/Stable). RAK's external position is therefore not a constraint on its foreign currency IDR as RAK can obtain foreign currency in exchange for dirhams from the UAE central bank on demand and does not need its own foreign currency reserves. However, the rating does not factor in special support from the FG that might be provided if needed, even though that would likely be forthcoming if requested.

RAK's public finances are a key strength in its credit profile. Official figures are on a public sector-wide basis, including all major state-owned enterprises (SOEs). While this hampers comparison with other sovereigns, where data is usually on a central or general government basis, in the case of RAK, with a number of strategic SOEs, it makes contingent liabilities explicit and significantly reduces the risk of a Dubai-style crisis stemming from unmonitored and excessive SOE borrowing. Budget and balance sheet data are available quarterly, favourably marking out RAK from its neighbouring emirates and many other sovereigns.

Fiscal data show a continued improvement in public finances since the debt ratio peaked at 31.2% of GDP in 2009, when RAK was adversely affected by the global financial crisis and its impact on Dubai - an important market. That shock also coincided with an ambitious infrastructure programme, partly financed by debt. RAK has typically run a current budget surplus, i.e. excluding capital and development spending. Therefore, as key infrastructure projects have been completed, development spending has fallen to more sustainable levels and the overall budget has returned to surplus. This averaged around 4% of GDP in 2010 and 2011 and is projected to continue at around 2% of GDP, even after equity injections into some new ventures. Public finance metrics are much stronger than 'A' category medians.

RAK has been adept at finding new markets for its products in response to the varying fortunes of key countries in the region. Continuing robust infrastructure spending in Abu Dhabi and throughout the Gulf Cooperation Council (GCC) plays to RAK's comparative advantage in construction materials and basic manufacturing. More recent ventures have also met with impressive success. A swathe of new hotels enjoy solid occupancy levels, with tourist arrivals up 40% in 2011 and forecast to exceed one million this year, a fivefold increase since 2007. New ventures include the recently completed RAK Maritime City free zone; redevelopment of RAK's large but underutilised airport; building on strengths in the auto sector; and the recent announcement by Real Madrid football club of a USD1bn resort complex.

Tracking progress in the wider economy is still hampered by the lack of comprehensive high frequency data. In order to address this deficiency, RAK will begin producing quarterly GDP data in 2012, another first for the UAE and the region, and is already compiling a more timely consumer price index. Other data deficiencies are a feature of the federal nature of the UAE, with the FG responsible for monetary, balance of payments and overall national accounts data, notably the volume and expenditure based GDP which are only available with a long lag. Provision of higher quality and more timely data by the FG authorities would be beneficial to assessing the situation in RAK.

Short-term downside risks are focussed on the tensions surrounding Iran's nuclear programme. Although Fitch regards prolonged closure of the nearby Straits of Hormuz a low probability event, the outbreak of outright hostilities in the region would obviously be damaging for business, especially for sensitive areas like tourism. Any lasting damage would depend on the duration and scale of hostilities and the nature of any Iranian retaliation.

On the upside, positive rating pressure would come from further improvements in public finances, accompanied by the success of the development model, proxied for example by rising per capita income and employment, and improvements in the quality and timeliness of data to track progress.